What are the Different Kinds of Loans in India? How Are They Different?
Whether you're buying a home, funding education, handling an emergency, or starting a business, loans help bridge financial gaps. But with so many loan types available, choosing the right one can be confusing. Understanding the differences between loan types helps you make smarter borrowing decisions and save money on interest.
Secured vs Unsecured Loans: The Basic Classification
All loans in India broadly fall into two categories:
Secured Loans
These loans are backed by collateral - an asset you pledge as security. If you default, the lender can seize the asset. Because the lender's risk is lower, secured loans typically offer:
- Lower interest rates
- Higher loan amounts
- Longer repayment tenures
Examples: Home loans, car loans, gold loans, loan against property, loan against mutual funds
Unsecured Loans
These loans don't require any collateral. Lenders evaluate your creditworthiness based on income, credit score, and repayment history. Since the lender's risk is higher:
- Interest rates are higher
- Loan amounts are typically lower
- Shorter repayment periods
- Stricter eligibility criteria
Examples: Personal loans, credit card debt, some education loans
Types of Loans in India
1. Personal Loans (Unsecured)
Personal loans are the most flexible loan type with no restrictions on end-use. You can use them for medical emergencies, weddings, travel, debt consolidation, or any personal expense.
| Feature | Details |
|---|---|
| Interest Rate | 10.49% - 24% p.a. |
| Loan Amount | Rs 50,000 - Rs 40 lakh |
| Tenure | 1-5 years |
| Collateral | Not required |
| Credit Score Needed | 700+ for best rates |
Interest rate factors (2025):
- Credit score 750+ with high income: 10.49% - 13%
- Credit score 700-750: 13% - 16%
- Credit score 650-700: 16% - 20%
- Credit score below 650: 20% - 24% (if approved)
2. Home Loans (Secured)
Home loans help you purchase residential property, with the property itself serving as collateral. They offer the lowest interest rates among all loan types due to the secured nature and long tenure.
| Feature | Details |
|---|---|
| Interest Rate | 8% - 9.5% p.a. |
| Loan Amount | Up to Rs 5+ crore |
| Tenure | Up to 30 years |
| LTV Ratio | Up to 80-90% of property value |
| Tax Benefits | Section 80C (principal) & 24(b) (interest) |
3. Education Loans (Secured/Unsecured)
Education loans fund higher studies in India or abroad. The student is the primary borrower, with parents or guardians as co-applicants.
| Feature | Details |
|---|---|
| Interest Rate | 9% - 13% p.a. |
| Loan Amount | Rs 4 lakh - Rs 1.5 crore+ |
| Collateral-free Limit | Up to Rs 7.5 lakh (under CGFSEL) |
| Moratorium Period | Course duration + 6-12 months |
| Tax Benefits | Section 80E (interest deduction) |
Government Support: Under the Central Government's Credit Guarantee Fund Scheme for Education Loans (CGFSEL), students can get collateral-free loans up to Rs 7.5 lakh with 75% government guarantee coverage.
4. Car/Vehicle Loans (Secured)
Vehicle loans help you purchase new or used cars, two-wheelers, or commercial vehicles. The vehicle serves as collateral.
| Feature | Details |
|---|---|
| Interest Rate | 9% - 11% p.a. |
| Loan Amount | Up to 90% of vehicle cost |
| Tenure | 1-7 years |
| Down Payment | 10-20% of vehicle value |
5. Gold Loans (Secured)
Gold loans let you pledge gold jewelry as collateral. They're quick to process and don't require income proof or credit score checks.
| Feature | Details |
|---|---|
| Interest Rate | 7% - 15% p.a. |
| LTV Ratio | Up to 75% of gold value |
| Processing Time | Minutes to hours |
| Documentation | Minimal (ID proof mainly) |
6. Loan Against Property (Secured)
LAP allows you to pledge residential or commercial property as collateral. You can use the funds for any purpose - business expansion, education, medical expenses, etc.
| Feature | Details |
|---|---|
| Interest Rate | 9% - 14% p.a. |
| LTV Ratio | 50-70% of property value |
| Tenure | Up to 15-20 years |
7. Business Loans
Business loans help entrepreneurs fund working capital, expansion, equipment purchase, or inventory. They can be secured or unsecured.
| Feature | Details |
|---|---|
| Interest Rate | 10% - 20% p.a. |
| Loan Amount | Rs 50,000 - Rs 5 crore+ |
| Types | Working capital, term loans, machinery loans |
Quick Comparison: All Loan Types
| Loan Type | Interest Rate | Secured? | Processing Time |
|---|---|---|---|
| Home Loan | 8-9.5% | Yes | 1-3 weeks |
| Car Loan | 9-11% | Yes | 2-7 days |
| Gold Loan | 7-15% | Yes | Same day |
| Loan Against MF | 9-12% | Yes | Same day |
| Personal Loan | 10.49-24% | No | 1-3 days |
| Education Loan | 9-13% | Both | 1-2 weeks |
How to Choose the Right Loan
- For a specific purpose - Choose purpose-specific loans (home loan for house, car loan for vehicle) as they offer lower rates
- If you have assets to pledge - Secured loans always offer better rates than unsecured loans
- For emergencies without assets - Personal loans offer flexibility but at higher rates
- For investment-backed liquidity - Loan against mutual funds or securities is the smartest option
Loan Against Mutual Funds: The Smart Alternative
If you have mutual fund investments, why take a high-interest personal loan? At DhanLAP, you can get a Loan Against Mutual Funds (LAMF) at much lower interest rates:
- Interest rates starting from 9% - Much lower than personal loans
- Keep your investments growing - No need to redeem
- Quick disbursement - Often same-day
- Flexible repayment - Pay only interest, repay principal anytime
- No foreclosure charges - Prepay without penalty
Final Thoughts
The right loan depends on your specific need, available collateral, and how quickly you need funds. Always compare interest rates, processing fees, prepayment charges, and terms across lenders before deciding. And remember - the best loan is often the one you don't need to take. Build an emergency fund and use your existing investments as collateral before opting for high-interest unsecured debt.
